Rural microfinance is important for development.
Microfinance is the provision of banking services to low-income individuals, entrepreneurs and small business owners . The concept, which usually appears in the plural ( microfinance ), includes everything from loans to savings tools, insurance and investment alternatives, always with reduced amounts .
Before moving forward, it is important to indicate that the compositional element micro- refers to that which is very small. The idea of finance , meanwhile, refers to assets, wealth, businesses or the economy .
Microcredits or microloans and microinsurance are part of the microfinance offering. Because of the ease of access, this modality is often associated with the idea of banking for the poor .
History of microfinance
Jonathan Swift is often credited as the father of microfinance. The Irish author and priest, creator of Gulliver's Travels , promoted the creation of the Irish Loan Funds in 1721 .
This system, inspired by the already existing popular credit system, was based on the granting of interest-free loans of no more than 10 pounds. According to historians, this resource helped many people to escape the poverty that was ravaging Ireland after a famine.
In that same country, at that time the Dublin Musical Society also began to offer what we now understand as microcredits, in this case with a limit of 4 pounds. The concerts of this entity were the instrument that allowed it to obtain the funds for financing .
In the following century, microfinance expanded with the German rural cooperatives , which, with the capital accumulated through the savings of their members, decided to grant small loans. There were also other credit and savings cooperatives, such as Raiffeisen in Switzerland .
The definitive take-off of microfinance, however, came in 1976 with the microcredits of the Grameen Bank . Founded by Muhammad Yunus , the Bangladeshi entity bet on financial inclusion by granting loans with few requirements to farmers.
It is common to associate microfinance with ethical banking.
Its benefits
Microfinance is valued for the social benefits it provides. It is often included in the group of solidarity finances or ethical finances since it is often not for profit or its main objective is the economic empowerment of its users.
They often work with the precept of unsecured credit or with basic requirements. Thus, those who are not served by traditional banks find institutions that receive them and give them development loans with reduced interest rates , allow them to send or receive money transfers, use mobile payment services, etc.
In rural areas, microfinance institutions often offer loans to farmers and crop insurance . Their portfolio may also include loans for local crafts and alternative financing for community projects.
The social impact of microfinance, in short, arises from support for the informal economy and from products that help achieve a reduction in inequality .
Microfinance institutions (MFIs) often offer loans for women entrepreneurs.
Microfinance Risk
While microfinance offers many benefits, it also carries certain risks. Ease of access can lead to over-indebtedness , with people taking out loans from several institutions simultaneously.
As for microcredits, it must be said that not all of them have low interest rates. In fact, there are many companies that provide these loans with few requirements but charging very high interest rates , even higher than those of conventional banks.
Transparency in microfinance is key so that users know the conditions of the service. On the other hand, financial education is essential: each individual must understand how the products work, the calculation of interest and the total amount to pay to repay the loan. Otherwise, they may make decisions with negative effects on their economy.
The role of technology
The importance of financial technology ( FinTech ) in microfinance should be highlighted. Innovation in financial products has generated enormous growth in the sector, mainly thanks to electronic wallets , but also due to other products and services.
Digital microfinance includes electronic payments and online credit applications, for example. Crowdfunding platforms can also be considered. However, FinTech can generate large financial movements that are far from micro.
What must be observed is that, with these services and the widespread use of mobile or cell phones that provide access to them, a large number of people were able to use banking services and begin to use these types of resources that were previously unattainable or, at least, inconvenient.
In the case of digital microfinance, proper use requires not only financial education, but also technological education. Using the telephone as a kind of bank branch or entity requires taking security precautions to avoid falling victim to scams or being the victim of a cybercrime. Beyond the measures implemented by the providers, users must adopt good practices and be aware of the risks inherent to the operations.